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Dynamic Relational Contracts with Credit Constraints

  • Jonathan P Thomas

    ()

    (School of Economics, The University of Edinburgh)

  • Tim Worrall

    ()

    (Economics, School of Social Sciences, University of Manchester)

This paper considers a long-term relationship between two agents who undertake costly actions or investments which produce a joint benefit. Agents have an opportunity to expropriate some of the joint benefit for their own use. The question asked is how to structure the investments and division of the surplus over time so as to avoid expropriation. It is shown that investments may be either above or below the efficient level and that actions and the division of the surplus converges to a stationary solution at which either both investment levels are efficient or both are below the efficient level.

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File URL: http://www.socialsciences.manchester.ac.uk/medialibrary/economics/discussionpapers/EDP-1009.pdf
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Paper provided by Economics, The University of Manchester in its series The School of Economics Discussion Paper Series with number 1009.

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Length: 45 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:man:sespap:1009
Note: We gratefully acknowledge the financial support of the Economic and Social Research Council (Research Grant: RES-000-23-0865). We also thank in particular Pierre Dubois, Francisco Gonzalez, Bruno Jullien and John Moore for helpful comments. An earlier version of this paper had the title ``Self-enforcing contracts with action dynamics''. The second author gratefully acknowledges the support of the Hallsworth Research Fellowship Fund at the University of Manchester.
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  1. Simon Board, 2011. "Relational Contracts and the Value of Loyalty," American Economic Review, American Economic Association, vol. 101(7), pages 3349-67, December.
  2. Maija Halonen, 2002. "Reputation And The Allocation Of Ownership," Economic Journal, Royal Economic Society, vol. 112(481), pages 539-558, July.
  3. Ligon, Ethan & Thomas, Jonathan P & Worrall, Tim, 2002. "Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies," Review of Economic Studies, Wiley Blackwell, vol. 69(1), pages 209-44, January.
  4. Natalia Kovrijnykh, 2013. "Debt Contracts with Partial Commitment," American Economic Review, American Economic Association, vol. 103(7), pages 2848-74, December.
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